building an efficient nordic power market -...

Fortum Energy Review November 2016

Building an efficient

Nordic power market

T he Nordic electricity market is considered to be among the most efficient regional

electricity markets in the world. Since establishment of the Nord Pool market in the early 1990s, security of supply has been at a very high level and electricity prices in the Nordic wholesale market have been historically among the lowest in Europe.

This edition of Fortum Energy Review focuses on the Nordic electricity market, presents current challenges and provides some solutions for fixing the identified problems. It is a follow-up to the Energy Review we published in March 2015 presenting the development path and key characteristics of the Nordic power market as well as future development areas. At that time, roughly 18 months ago, we had already identified a number of challenges, such as increasing intermittency and declining firm capacity, securing sufficient investment certainty for long-term generation adequacy and changing customer behaviour in the retail markets.

Today we can see that the same challenges are still there and, because of faster than anticipated changes in the market environment, some of those challenges are even more topical today. What is new in the discussion is the strong focus that has recently been placed on regional market development, signalling a more realistic and pragmatic approach. Policy makers have realised that the best way to reach the fully integrated and functional internal energy market is to proceed step-wise through regional market development and integration.

Electricity market development is indeed now very much in focus, both at the EU level and in member states. The EU Commission is expected to publish before the end of 2016 a “Fourth Energy Market Package”. Besides the EU process, all countries in the Nord Pool market are updating and preparing their national energy and climate strategies. In addition, the Nordic TSOs together1 and the Finnish TSO Fingrid2 on its own have produced position papers on the power market

Focus on the Nordic power market

Foreword

Focus on the Nordic power market

Summary of recommendations

1 Challenges and Opportunities for the Nordic Power System, August 2016

2 Electricity market needs fixing - What can we do?, May 2016

3 Strategic assessment is headed by Jorma Ollila, former CEO of Nokia and the Chairman of the Board of Shell. Mr. Ollila will present his initial findings at the Nordic energy ministers’ meeting on 24 November 2016 and the final report in March 2017

2

The diagnosis of the Nordic power market

Identified symptoms and proposed treatment

Foreword Contents

18

4

5

7

14

16

challenges. Furthermore, a strategic assessment on the development needs of Nordic energy cooperation is ongoing, launched by the Nordic Energy Council.3 This Energy Review is Fortum’s contribution to the topical discussion.

One of our main messages is that market integration should naturally be followed by stronger policy coordination and cooperation between countries in the same regional market, as decisions made in one country will inevitably impact other countries. National decisions to impose additional renewable energy targets (on top of the EU targets) and related subsidy schemes, major changes in energy taxation that might lead to premature capacity closures, fuel-specific national measures, such as carbon policies etc., are all good examples of decisions that always have broader regional impacts.

Fortum Corporation

Symptom 1: Growing divergence between retail

and wholesale electricity prices

Symptom 2: Growing disconnect between

electricity supply and market demand

Symptom 3: Growing need for reconciling

policy intervention with market functioning

Symptom 4: Growing need for better valuation

of scarcity in the after-spot markets

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Fortum Energy Review November 2016 November 2016 Fortum Energy Review

In terms of power generation capacity, there is no lack of electricity supply in the Nordic

market. On the contrary, the Nordic area is currently oversupplied and the degree of energy oversupply keeps increasing due to large investments in onshore wind and the forthcoming commissioning of the Olkiluoto 3 nuclear unit in Finland. Hence, energy supply is not a problem, but lack of transmission is. The Nordic internal transmission grid does not always enable sufficient imports from the surplus areas in Norway and northern Sweden to the deficit areas in southern Sweden and Finland. Insufficient cross-border connections partly explain why a system of strategic reserves have been implemented in Finland and Sweden and is now being considered for eastern Denmark.

During the past couple of years we have witnessed several capacity withdrawals in the Nordics, caused by the falling power futures prices. This has spurred concerns relating to the power supply adequacy. Some players have even started to advocate capacity markets to ensure availability of power plants that otherwise face risk of being shut down for profitability reasons. However, the latest Mid-term Adequacy Forecast by ENTSO-E1

shows that in 2020 security of supply

The diagnosis of the Nordic power market

is not a problem in any of the Nordic countries if the operational reserves are taken into account.

Despite the currently positive situation, we cannot expect the Nordic power market to continue ensuring security of supply without implementing corrective measures to the key market development challenges. These challenges are relating to massive investments in weather-dependent generation without any link to the demand development. There is also the increasing gap between consumer prices and wholesale prices, and an insufficient power grid that fails to transfer the oversupply of renewable power to the areas of consumption.

One additional emerging issue in the Nordic power system is the future sufficiency of inertia, or kinetic energy that the system needs in order to avoid sudden frequency changes. This issue has been identified as a potential problem following the recent closures of unprofitable power plants that have until now provided inertia and other system services for free to the power market.

The aim of this Energy Review is to illustrate the key development needs in the Nordic regional power market. We identify four main symptoms and

1 ENTSO-E = European Network of Transmission System Operators for Electricity

THE FOUR MARKET SYMPTOMS DISCUSSED IN THIS ENERGY REVIEW ARE:

1 Growing divergence between retail and wholesale electricity prices

2 Growing disconnect between electricity supply and market demand

3 Growing need for reconciling policy intervention with market functioning

4 Growing need for better valuation of scarcity in the after-spot markets

Identified symptoms and proposed treatment

propose treatment for each of them with a view to enable the continuation of a competitive market approach. Some of our recommendations are more detailed and addressed to various stakeholder groups. While some of the recommendations can be implemented as regional solutions, many of them require European-wide implementation in order to ensure a level playing field for all participants of the integrated electricity market and to optimise cross-border electricity trade.

* Wholesale and customer price development in the Nordics

€/MWh

350

300

250

200

150

100

50

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Sources: Eurostat, Nord Pool and Nasdaq Commodities

Year to date wholesale prices for 2016, as of Oct 21, 2016; for 2016-2026 forward prices

Nord Pool system price

Nordic forwards

Retail price in Finland

Nord Pool Finland

Forwards Finland

Retail price in Sweden

Retail price in Norway

Retail price in Denmark

T he wholesale electricity prices in the Nordic countries are currently only half of the levels

seen in 2006-2010, and the power futures suggest the prices will remain at about the current level in 2018-2026 in real terms*. At the same time, the consumer prices have increased in Finland, Denmark and Sweden by 10-30% compared with the levels in 2006-2010. Only in Norway has the average consumer price slightly decreased.

Symptom 1: Growing divergence between retail and wholesale electricity prices

Increased energy taxes, renewable subsidy costs and grid charges are behind the higher energy bills. In Finland the renewable subsidy costs are not explicitly included in the bill, as the subsidy is paid from the state budget; but the increased grid service fees as well as steadily increasing taxation are pushing end-consumer prices higher. Overall, the wholesale price accounts for less than 20% of the end-consumer price

The wholesale price accounts for less than 20% of the end-consumer price.

54


OUR RECOMMENDATIONS, IN BRIEF • Minimise the gap between

consumer and wholesale electricity prices to stimulate the use of increasingly clean Nordic electricity • Remove renewable support

fees in the consumer price• Grid fees should be

developed so that they better reflect the supply situation and system costs during scarcity situations

• Look at the possibility to make the electricity tax more dynamic

Symptom 2: Growing disconnect between electricity supply and market demand

In the Nordics, and more broadly in Northern Europe, subsidy-based renewable generation has been

rapidly growing while electricity demand has been stalling. This growing oversupply has reduced the usage and profitability of generation operating in the market. In Sweden, where more than a third of the electricity is generated by nuclear, the wholesale price has in recent years remained below the operational cost of nuclear generation. The agreed phase out of the nuclear capacity tax in Sweden from 2018 will, however, improve the situation.

The deteriorating profitability has triggered closures of a number of conventional power plants as well as cancellation of some previously planned investments. Among the largest recent Nordic capacity closures are 480-MW of coal condense in Finland and a 661-MW nuclear unit in Sweden in 2015, as well as 2200 MW of decided nuclear closures in Sweden by the end of 2020. So far, however, power capacity withdrawals in total are still much lower than the combined increase in wind, nuclear (Olkiluoto 3 in Finland) and biomass capacity over the next five years.

in the Nordic countries. The most extreme situation is in Denmark where the wholesale price is only 10% of the consumer price. Given this unbalanced situation, it is very difficult for end-consumers to notice the changes in the wholesale prices. This reduces the attractiveness to react to the market price through demand response. However, great expectations have been placed on demand response in the future energy system where weather-dependent renewables need to be integrated in the power market.

In order to stimulate demand response, the changes in the wholesale price should be clearly visible in the end-consumer price.

In order to stimulate demand response, the changes in the wholesale price reflecting the tight situation in the power system should be clearly visible in the prices for those consumers who have chosen dynamic pricing alternatives. For that purpose, the fixed components of the consumer price should be minimised.

One solution for reducing the gap between consumer and wholesale electricity prices is to exclude from the consumer price the component related to renewable subsidies, which are pure policy costs. In addition, governments could look at the possibility to make the electricity tax more reflective of the market situation, i.e. encourage electricity consumption during an oversupply situation and discourage it during scarcity situation.

Also, the grid fees could be based on peak consumption. This measure would help make consumer prices more reflective of the system costs, i.e. the cost of having enough power lines for the highest level of consumption. That would make it easier for the consumer to compare the cost-benefits between centralised and decentralised (such as own solar panels and batteries) options. Additionally, the grid fees could be weighted so that they would be higher during the periods when the probability of scarcity in the power system, i.e. weekdays in the winter time, would be higher, too.

RES, TWh Consumption, TWh

250

200

150

100

50

0

1,800

1,750

1,700

1,650

1,600

1,550

Evolution of electricity demand and RES generation in Northern Europe

2008 20122009 20132010 20142011 2015

Solar Wind Consumption

€/MWh

60

50

40

30

20

10

0

Operational cost of nuclear above electricity price in Sweden

Nuclear taxes

Nuclear waste fee

Market electricity price, spot in Stockholm area

Market electricity price, futures as of 20 Oct, 2016

Average operational cost

Average operational cost of 2014

2008 2012 20182009 2013 20192010 2014 20202011 20172015 2016

Sources: Oskarshamn, Forsmark and Ringhals annual reports 2009-2013, Dagens Industri, Nord Pool, Nasdaq Commodities

Sources: ENTSO-E, UCTE, Nordel and Eurostat statistics (2008)

Northern Europe here means the area including the Nordics, Baltics, Poland, Germany, Benelux, UK and Ireland.

Proposed treatment

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Withdrawal of some 5,000 MW of thermal capacity was announced in 2014-2015

A new transmission line between northern Finland and Sweden could remove the need for capacity reserves in both countries.

ENTSO-E Ten-Year Network Development Plan. The relatively large price divergence between the European countries shows that the European transmission grid is currently insufficient for the transfer of the oversupply in Germany and the Nordics to other countries. This limits realisation of the European-wide environmental benefit of the investments already made in renewable generation.

However, the latest Mid-term Adequacy Forecast by the European Network of Transmission System Operators for Electricity (ENTSO-E)2 indicates that there will not yet be any problem with security of supply in any of the Nordic countries in 2020 if the operational reserves are taken into account. Nevertheless, the report points out that unavailability of cross-border capacity between Finland and Sweden and between Finland and Estonia in scarcity situations can translate to adequacy

problems in Finland. The report also says that some minor adequacy issues are possible in Sweden in 2025. These risks of inability to meet power demand in Finland or Southern Sweden could be substantially reduced by building the third AC transmission line 800 MW between northern Finland and Sweden. The collected congestion rents between Finland and Sweden in 2014 and 2015 (around € 270M) would already be more than enough to cover the costs of the project 3. This interconnector

2 https://www.entsoe.eu/outlooks/maf/Pages/default.aspx

3 Estimated to be below 200 MEUR

Finland Sweden Denmark Norway

Hanasaari coal CHP (2x110 MW) to be closed by end of 2024. New 200-MW biomass CHP project put on hold, separate heat-only biomass boilers to be built instead – Helen

Kristiina (242 MW) and Tahkoluoto (235 MW) coal-condense permanently closed – PVO

Haapavesi peat condense plant (160 MW) to capacity reserve – Kanteleen Voima Naistenlahti 1 gas-CHP (129 MW) to capacity reserve – Tampereen Energiantuotanto

Olkiluoto 4 nuclear unit license application not submitted – TVO

Ringhals 2 (865 MW) and Ringhals 1 (878 MW) nuclear units to be closed in 2019 and 2020 – Vattenfall

Oskarshamn 2 (661 MW) nuclear unit not to resume production and Oskarshamn 1 (492 MW) to be closed in 2017 – Uniper (E.ON)

Forsmark 3 (1170 MW) nuclear unit not to proceed with the 170-MW upgrade – Vattenfall

Studstrupværket 4 coal unit (380 MW) to be closed in 2017 – Dong

Asnæsværket coal units (142 MW + reserve 640 MW) to be replaced by a small biomass unit in 2018 – Dong

Naturkraft’s Kårstø (420 MW) gas CCGT plant mothballed and planned to be dismantled – Statoil, Statkraft

120

100

80

60

40

20

0

Congestion rent between Nordic bidding zones

2014 2015

Source: Nord Pool

MEUR

DK1-D

K2

DK1-N

O2

DK1-SE3

DK2-SE4

SE1-S

E2

SE2-S

E3

SE3-

SE4

FI-SE

1

FI-SE

3

NO1-S

E3

NO3-

SE2

NO4-

SE1

NO4-

SE2

NO2-NO

5

NO1-N

O2

NO1-N

O5

NO1-N

O3

NO3-

NO4

The third AC transmission line between Sweden and Finland can be built with the money collected by TSOs in 2014 and 2015 because of the diff erence between the wholesale electricity prices in the countries.

would enable higher power flow from northern Sweden to Finland and to southern Sweden through Finland, which would help in maintaining capacity adequacy in both Finland and southern Sweden after the decided nuclear closures in Sweden. A new transmission line could even remove the need for capacity reserves in both countries.

Also broader development of the European power grid needs to proceed as described in the

98


The levellised cost of electricity means the volume weighted average electricity price needed to cover total costs of a new power plant. The presented fi gures do not represent Fortum’s own view on the levellised cost of electricity. Calculations are made based on data from several public sources assuming a 7% cost of capital: World Energy Council 2013, Cost of energy technologies; European PV Technology Platform Steering Committee, PV LCOE Working Group: PV LCOE in Europe 2014-30, Final report; IRENA: Renewable power generation costs in 2014; Fraunhofer: Levellised cost of electricity, Edition November 2013; Elforsk report: Electricity from new and future plants 2014; Lazard’s Levellised cost of energy analysis 9.0. The fossil fuel prices and the EUA price are assumed at the level of market futures as of 20.10.2016 extended with infl ation of 2%.

€/MWh

Indicative ranges of levellised cost of electricity (LCOE) for diff erent generation technologies

Nuclear Gas Coal SolarWind onshore

HydroWind off shore

Woodchips

120

100

80

60

40

20

0

Onshore wind has already become mature generation technology. When the market price starts signalling the need for new investments, they will predominately be in onshore wind.

If subsidies continue, so will the overcapacity.

The Nordic TSOs have recently pointed out a problem relating to the decreasing inertia in the power system following the firm capacity withdrawals, while at the same time renewable generation has increased in the system.4 Inertia is essential for maintaining operational security. As a short-term solution to the problem, the TSOs propose running existing production units with lower average power output or limiting the power output of the largest units to a level

Big disparity in day-ahead electricity prices on European power exchanges illustrates insuffi ciency of transmission capacity

€/MWh, real 2015

FI Stockholm DE PL UK FR IT ES

100

90

80

70

60

50

40

30

20

10

02000 2004 20102001 2005 20112002 2006 20122003 20092007 2013 20152008 2014 2016

YTD

Source: Bloomberg Finance LP

where the frequency remains inside the permitted limits. However, a better solution to deal with declining inertia would be to guarantee sufficient inertia by implementing or contracting additional sources of inertia from the market as a system service.

Proposed treatmentThe current subsidy-driven oversupply situation in the Nordic market is likely to continue for many years. If subsidies continue, so will the overcapacity and low wholesale prices. The message behind the low wholesale market price is that no new investment in electricity generation is needed. If subsidies were stopped, most investments would probably stop for a while. When the market starts again signalling the need for new investments, they will predominately be in renewable generation, in any case, as onshore wind has become the least expensive technology to invest in for new generation in the Nordics5. Investments in large-scale renewables are already happening on a purely market basis in Europe.6 Therefore, after the ongoing renewable subsidy regimes have expired, there would be no need for any additional support schemes.

4 http://www.fingrid.fi/en/news/announcements/Pages/Report-Challenges-and-opportunities-for-the-Nordic-power-system.aspx

5 Waste-to-energy CHP and large biomass CHP plants may have an even lower levellised cost of electricity, but they can be built only in places with a sufficient heat load

6 For example, in Portugal in August 2016, there was already 380 MW of approved solar PV projects without subsidies or preferential rates

INERTIA IN BRIEF

Inertia refers to the resistance of the power system to change its frequency after changes in the generation-load balance. The higher the inertia, the smaller the variations in system frequency are, which means better operational security.

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OUR RECOMMENDATIONS, IN BRIEF

• Gradually abolish RES subsidies in the ETS sectors and focus on decarbonisation through efficient carbon pricing

• The EU ETS to be reformed through a combination of short- and long-term measures

• Common Nordic (and larger regional, even European) grid planning

• Collected congestion incomes should be used for grid investments to relieve the congestion

• The TSOs need to guarantee sufficient inertia by implementing or contracting additional inertia resources

Complementary national decarbonisation measures should focus on sectors excluded from ETS

Pursuing energy transition solely through the selective deployment of technologies produces unfavourable effects, such as the continued operation of most polluting power plants and innovation lock-in, thus making national renewables support an unsuitable instrument for the cost-efficient reduction of GHG emissions at the EU level. As the EU ETS emissions are capped, the voluntary national emission reduction measures in the power

Investments in energy transmission infrastructure should be accelerated to eliminate the existing bottlenecks. Importantly, the grid planning should be made from the top-down, using the cumulated congestion rents as an indication of where the investment need is most urgent. Based on this criteria, the third AC transmission line between northern Sweden and Finland should be developed as a matter of priority. This connection would help to ease the expected capacity adequacy situation in southern Sweden after the planned nuclear closures, and it would allow Finland to increase imports from oversupplied areas in Sweden to power-deficit Finland.

The incoming issues of lack of inertia should be seen as part of the system services that generators can provide for TSOs. Therefore, developing a market mechanism for inertia should be considered.

70

60

50

40

30

20

10

0

Total futures price for RES in Sweden (SYS+EPAD+elcert) at time of investment decision in onshore wind (€/MWh)

20152014 2016 2017 2018 2019 2020

Cost of onshore wind below €40/MWh at least in some locations.

24/01/2013 SE4

23/04/2013 SE2

29/11/2013 SE3

30/05/2014 SE1

29/08/2014 SE2

30/12/2014 SE2

05/08/2015 SE2

23/02/2016 NO3

(EPAD for SE2 used)

15/04/2016 SE2

33MW HS Kraft Ab

15MW NV Nordisk Vindkraft AB90MW NV Nordisk Vindkraft AB

30MW NV Nordisk Vindkraft AB

162MW WPD Scandinavia AB

58MW Element Power US LLC

1800MW Markbygden Vind AB

75MW Fortum (Solberg)

1000MW Fosen Vind DA

Sources: Nasdaq Commodities, http://skm.se/priceinfo/, companies’ websites

sector do not necessarily result in reduction of total emissions in the EU. Decarbonisation of the ETS sector is most efficiently promoted by reforming the system through a combination of short- and long-term measures.7 If a member state wants to strengthen the joint European effort in climate change mitigation, the focus should be on increasing the ambition for the non-ETS sectors, e.g. transportation and small-scale heating.

7 See the recent analysis by seven major European utilities: Reforming the EU ETS, Comparative evaluation of the different options, November 2016

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8 “Regional Electricity Market Design”, Ea Energy Analyses, 2016 “Impact Assessment of Capacity Mechanisms”, Frontier Economics, 2014 “Securing Power during the Transition”, IEA, 2012

Symptom 3: Growing need for reconciling policy intervention with market functioning

R apidly increasing weather-dependent renewable generation, closures of flexible

generation capacity and challenges with profitability of the remaining flexible generation have cast doubt on the effectiveness of the market model based on scarcity pricing. In the power system with rising oversupply, the scarcity situations happen more seldom and all capacity may not get the necessary premium to cover all the fixed costs. This has, even in the Nordics, led to discussions about a need for a wider capacity remuneration mechanism than the current capacity reserves. The rising oversupply is mainly the result of political intervention to the power market in the form of renewable support mechanisms. Continuation of such intervention without moving to market incentives can eventually lead to the necessity for some fixing mechanisms in the form of capacity mechanism.

Although there is already quite a number of different capacity remuneration mechanisms either in place or planned, the European Commission sees them as a possible solution only if there is a clear problem with capacity adequacy and no other measures available, such as raising the price caps or removal of other barriers in the electricity and system services markets, or strengthening the power grid. Several studies support the view

€/MWh

MWh/h

3,000

2,500

2,000

1,500

1,000

500

0

-500

Spot bid curves for the winter peak price (200 €/MWh) hour 8–9 on 20 January, 2016

Buy curve Sell curve

60,000 62,000 64,000 66,000 68,000 70,000 72,000

Demand is rather price elastic in the Nordics. Still c.a. 3 GW bids were not activated out of which 1.7 GW from the buy side.

Source: Nord Pool


• Develop energy policies towards more market-conscious practices

• Regional capacity adequacy assessment for the decisions related to security of supply

• Stronger policy coordination is needed between the countries

large-scale investments happen outside the market, driven by subsidies. An increase in oversupply because of subsidised investments makes scarcity situations rare, which reduces the profitability of flexible peak-load generation and may eventually lead to problems with security of supply. In order to explore cost efficiency of the market arrangements, the focus should be on preventing further growth of oversupply by phasing out subsidies. The quicker the market rebalances, the lower the risk of adverse consequences for security of supply. The active reaction of consumers to the wholesale market price also reduces adequacy risks. The market rebalancing and demand response may be facilitated by reducing the gap between the consumer and the wholesale prices. In parallel, efforts

that a full-scale capacity market is a costlier alternative than the energy-only market solution, and it also comes with higher regulation risks8.

Despite that the transition towards a low-carbon system is already ongoing, it will not happen overnight. Some 30% of electricity is currently generated by fossil condense in Europe, and in 2040 some 15% of fossil condense in the electricity mix would also be fully consistent with the greenhouse gas reduction path to reach the EU 2050 visionary target. This means that there should still be enough fossil condense generation to provide adequate price signals in the European integrated electricity markets during the next two decades.

In the future, demand response and storage will also play a role in setting the market prices. Flexible demand has already been providing price signals in the Nordic electricity markets to an increasing extent – a trend that can be expected to gain strength, given that there will be an increasing number of dynamic pricing alternatives available in the retail markets.

In the longer term, when the power system becomes almost entirely decarbonised, the price signals in the energy-only market may be coming from biomass plants, fossil plants

to develop the power grid need to be made so that resources can be efficiently used across the whole market area. In case “something extra” is still needed, strategic reserve arrangements can be used to solve identified adequacy problems without distorting the market price signals.

In addition to the major corrective measures described above, other improvements to the current market arrangements would help in removing the barriers to the correct reflection of the scarcity cost in the market prices and in engaging all resources available in the market in balancing the system. These improvements are discussed in the next section.

In order to avoid diverging national market designs, Nordic cooperation

of energy policies should be improved. We think that the Nordic Council of Ministers can be the platform for intensified regional cooperation between the Nordic countries if the annual meetings at the ministerial level focus on ensuring political steering and commitment to the regional development. A regional platform consisting of the representatives from key stakeholder groups (energy industry, TSOs, regulators) and ministries should be established to address regularly topical power market-related issues and to prepare issues for the ministers to discuss and decide. In addition to this more technical stakeholder platform, it is important to ensure that ministers responsible for energy policies in each country have the possibility to regularly meet and have a dialogue with energy industry representatives e.g. in the context of the annual Nordic Council energy ministers’ meetings. The involvement of the EU Commission should also be increased.

with carbon capture, and water values of hydropower. In times of deficit or surplus, demand response and storage will probably be setting the price.

Irrespective to how the power market design develops in the future, it is important to ensure that the development happens in the same direction in all countries forming the Nordic power market. Otherwise we will start losing the benefits brought by the efficient cross-border trade. In order to enhance regional decision making and implementation, there needs to be more cooperation. Nordic-level bodies exist on various levels: ministers, TSOs, regulators, power industry associations. But a common forum bringing them all together has been missing in the Nordics. For example, TSOs agree on a regional solution, but the final decisions are often made by the national regulators and politicians, who aren't necessarily committed to implementing those regional initiatives.

Proposed treatment

The market model based on scarcity pricing can be a cost-effective market design solution both in the short and long term, giving price signals for efficient dispatching and for investments. However, no market design solution can be efficient if

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Symptom 4: Growing need for better valuation of scarcity in the after-spot markets

A s the share of wind generation has been rapidly rising in northern Europe, the need for

balancing energy has increased. The Nordic power market rules should be adapted so that all balancing resources can be maximally engaged.

The common Nordic balancing market ensures operational security together with automatic frequency regulation and contracted balancing reserves. Only those production and consumption resources that are able to implement a minimum 10-MW capacity change in 15 minutes can submit bids to the balancing market. Lowering this minimum capacity requirement would allow participation of more resources in the balancing market, e.g. demand response resources. It is also problematic that the balancing energy prices are published on Nord Pool’s website with a delay of up to two hours after the hour of use. This slows the reaction of available resources in the market.

Another problem relates to the imbalance settlement rules, which are currently different for production and consumption in that production resources are not rewarded when their imbalance is contributing to balancing the overall system.

The current gate closure times in the balancing and intraday markets do not fit well in the current market environment. The gate closure time in the intraday market is now 60 minutes before the hour of use9 and 45 minutes in the balancing market; this restricts the possibility of commercial power trade to cover generation and demand variations.

The TSOs own and contract nationally certain power plants as fast reserves10 in order to prepare for the situations when there is not enough up-regulation bids in the balancing market. The reserves are currently contracted only nationally.

There is also a need for an improvement in the formation of the imbalance price when the TSOs’ fast reserves are used. Currently, the balancing price is set to be equal to the highest available bid in the balancing market when reserves are used. This may lead to an intentionally too low market purchase in tight situations.

Proposed treatment

Balancing prices should be published in real-time. Also, lowering the minimum capacity requirement

for participation in the balancing market would allow the engagement of more resources.

One-price imbalance pricing that is used for consumption should also be applied to the production resources: during an up-regulation hour, the price of imbalance power is the up-regulation price, and during a down-regulation hour, the price of imbalance power is the down-regulation price. This would motivate the production resources to contribute more to the system balancing. The one-price imbalance pricing is also a common practice in Europe in general.

In addition, shortening the gate closure times in the after-spot markets to 15 minutes would improve the use of commercial resources and may also reduce the number of occasions when the fast TSO reserves are activated.

The balancing price should be at least double the day-ahead and intraday prices in the hours when the fast reserves are activated.

Another possible improvement concerns formation of the price in the day-ahead market when strategic reserves are used. In order

9 Positively, Nord Pool has launched a pilot with a 30-minute gate closure time in Finland and in Estonia during Sept-Dec 2016

10 Manual frequency restoration reserves, the reserves with an activation time of 15 minutes maximum


• Real-time publishing of balancing prices

• One-price imbalance pricing for both consumption and production

• Imbalance price when TSOs’ reserves used should be at least double the day-ahead and intraday prices to avoid an intentionally too low market purchase in tight situations

• Set the day-ahead price equal to the day-ahead market technical price ceiling when strategic reserves are used, and increase the price ceiling

• Shorten the intraday and balancing market gate closure times to 15 minutes

• If cost-benefit analysis supports, eventually shorten the trading, measurement and imbalance settlement period to 15 minutes with an adequate transition period

• Regional Nordic+Baltic procurement of the frequency restoration reserves

The Nordic power market rules should be adapted so that all balancing resources can be maximally engaged.

to enable the use of all commercial resources before strategic reserves or curtailments of consumption, we propose setting the day-ahead price at the price ceiling level when the strategic reserves are activated and raising the price ceiling to reveal the true value of lost load.

In order to increase competition in reserves procurement, there could be a regional Nordic+Baltic market for procurement of the fast reserves within the limits set by the grid congestions, similarly to the procurement of the primary regulation reserves.

A measure with a more long-term implementation is shortening the trading period from the current one hour in the day-ahead, intraday and balancing markets and the imbalance settlement period.

As the Nordic power market is a part of the integrated European power market, similar changes should ideally happen in the whole integrated region.

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B elow is a summary of our proposed solutions to the challenges identified above. The recommendations are grouped based on the concerned stakeholders in the power markets.

RECOMMENDATIONS FOR REGULATORS

• Real-time publishing of balancing prices

• One-price imbalance pricing for both consumption and production

• Imbalance price when TSOs’ reserves used should be at least double the day-ahead and intraday prices to avoid an intentionally too low market purchase in tight situations

• Set the day-ahead price equal to the day-ahead market technical price ceiling when strategic reserves are used, and increase the price ceiling from the current €3000/MWh to enable the use of all commercial resources before strategic reserves or curtailments

• Shorten the intraday and balancing market gate closure times to 15 minutes

• If cost-benefit analysis supports, eventually shorten the trading, measurement and imbalance settlement period to 15 minutes with an adequate transition period

• Regional capacity adequacy assessment and common strategic reserves, if still needed

Summary of recommendations

FORTUM ENERGY REVIEW on the Nordic Power Market, November 2016

Publisher: Fortum Corporation Keilaniementie, P.O. Box 1 02150 Espoo, Finland tel. +358 10 4511

Authors: Sergey Ilyukhin, Merja Paavola, Laura Karjalainen, Pekka Vile FORTUM PUBLIC AFFAIRS: Esa Hyvärinen tel. +358 10 453 2244

More of Fortum's positions on topical energy issues: www.fortum.com > About us > Corporate Relations > Position papers www.fortum.com

RECOMMENDATIONS FOR POLITICIANS

• More energy and climate policy coordination between Nordic and Baltic countries

• Gradually abolish RES subsidies in the sectors included in EU ETS and focus on steering decarbonisation through efficient carbon pricing

• Strenghten coordination of the climate and energy policies between countries in the same regional market

• Minimise the gap between the consumer and wholesale electricity prices to stimulate the use of increasingly clean Nordic electricity

• Remove renewable support fees in the consumer price

• Allocate the grid services fees more to the periods with a higher probability of scarcity in the power system

RECOMMENDATIONS FOR THE NORDIC COUNCIL OF MINISTERS

• Establish a broad stakeholder platform consisting of the representatives from industry, TSOs, regulators, and ministries to prepare issues for the ministers to discuss and decide on during the annual meetings

• Make the annual ministerial meeting the place where political commitment is made to implement the agreed development issues

• Ensure that all Nordic countries follow the same path in market design

• Involve also the EU Commission

Many of the recommended solutions require also implementation in all the European integrated electricity markets in order to optimise cross-border trade and harmonise the competitive environment for all participants of the integrated markets.

• Common Nordic (and larger regional, even European) grid planning irrespective of national borders and based on total socio-economic benefits and costs

• Collected congestion incomes should be used for grid investments to relieve the congestion

• The TSOs need to guarantee sufficient inertia by implementing or contracting additional inertia resources

• Regional Nordic+Baltic procurement of the frequency restoration reserves

RECOMMENDATIONS FOR TSOs

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Nordic Power Market – Fortum’s key messages

• The gap between the customer price and the wholesale price should be reduced in order to accelerate decarbonisation through electrification and activate more participation from the demand side

• RES subsidies in the sectors included in the EU ETS should be gradually abolished to avoid inefficiencies brought by overlapping mechanisms and to stop the growth of the oversupply in the power markets with adverse effects on market development

• After-spot markets should be developed to remove the barriers to the correct reflection of the scarcity cost in the market prices and to engage all resources available in the market in balancing the system

• All Nordic countries should follow the same path in market design and increase energy policy coordination

The energy sector is in the middle of a transition. Megatrends, such as climate change, emerging new technologies, changes in consumer behaviour and questions regarding resource efficiency, have a major impact on the energy sector globally. Our intention is to actively participate in the

market transition and to be part of the solutions.

The Fortum Energy Review series highlights the challenges and opportunities we see in the energy sector and outlines our solutions to them. We want the Fortum Energy Review to engage our

stakeholders in a dialogue about the future direction.

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